Why Global Savings Will Keep U.S. Borrowing Rates Low

I’ve argued that U.S. borrowing rates will continue sitting pretty, despite the cascade of debt downgrades this country appears to have in store. That’s because when it comes to investments considered to be “safe havens,” there are few other places global investors can go. But here’s another reason looming downgrades aren’t likely to rock the boat: global savings over the next five years will continue to head up.

As a percentage of global GDP, the global saving rate is expected to jump 3.3 percentage points from 22.8 to 26.1% between 2010 and 2016, according to the IMF. The uptick is due to the fact that emerging markets are growing at a faster clip than developed economies, and as such they’re occupying an increasing share of global wealth. As the burden of global growth falls more and more to emerging markets, the pattern of global investing is shifting, too. As the University of Tilberg’s Heleen Mees points out on the blog VOX, emerging markets store far more of their savings in debt securities than developed economies, which tend to pile more savings into stocks. Indeed, the growth in debt securities globally more than doubled between 2002 and 2007, a phenomenon that has pushed down bond yields worldwide. Mees explains why:

Institutional constraints do at least in part account for emerging economies’ preference for fixed income assets over equity capital. These constraints include emerging economies’ underdeveloped financial markets and closed capital accounts, but also the reluctance of most Western countries to allow emerging economies’ sovereign wealth funds and state-owned enterprises to invest in equity capital of Western companies.

Of course, emerging markets would love more access to trustier financial markets abroad. China, for instance, has been begging to get bigger stakes in U.S. companies and stocks, which would offer far better returns on its $3 trillion in foreign exchange reserves than all those dowdy dollars. But the U.S., often for reasons of national security, has so far refused to give in.

That may be a mistake. The global pileup in U.S. Treasuries has its benefits, keeping borrowing rates artificially low. But it has its drawbacks, too. Today’s stock market swoon after S&P downgraded Fannie Mae and Freddie Mac, coupled with the accompanying drop in Treasury yields, suggests that the biggest threat facing the country isn’t higher borrowing costs; it’s a stagnating economy. Investors clearly aren’t choosing between U.S. Treasuries and other forms of sovereign debt. They’re choosing between hoarding cash and driving growth by making riskier investments.